Corporate restructuring is the reorganization of a company to meet new demands. These demands could be positive, such as the dramatic growth of the company to a point where existing structures no longer function efficiently. But, more commonly, the changing demands are negative, such as a sales slump, slowing economy, or other adverse business changes.

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Our blog posts, written by business experts, are one way of sharing our knowledge with you. In this blog, we are going to talk about corporate restructuring.

Corporate restructuring is the reorganization of a company to meet new demands. These demands could be positive, such as the dramatic growth of the company to a point where existing structures no longer function efficiently. But, more commonly, the changing demands are negative, such as a sales slump, slowing economy, or other adverse business changes. 

Whatever reason the company has for undergoing this complex process, the aim is generally to maximize the company’s strengths while increasing efficiency and profits. Corporate restructuring can include changes to business strategy, operations, department size and structure, and organizational structure.

Here’s what you need to know about corporate restructuring.

Reasons for Corporate Restructuring 

There are various reasons for considering a restructuring of a business, but they have a common thread – the company needs to improve business operations, make the best use of current assets, and increase profitability. Here are some of the common reasons for corporate restructuring: 

• Insufficient profits: a drop in profit can be caused by poor management decisions, changes in customer demand, or increased costs, for example, in 2021 when shipping costs soared. If the company isn’t making enough money, restructuring may be necessary. 
• Strategy adjustment: some companies stray from their core business over time, adding more divisions and subsidiaries. In some cases, this diversification can weaken the company, with unprofitable divisions affecting the company’s financial health. As a result, it may be necessary to realign business strategy by selling or reorganizing divisions. 
• Cash Flow Requirements: if the company is having difficulty raising new financing, it might consider selling underperforming or unprofitable divisions to bring much-needed financial liquidity. 
• Reverse Synergy: rather than creating business synergies by merging or acquiring companies, sometimes the opposite is true – the individual divisions are more valuable individually than as a merged unit. 

Types of Corporate Restructuring

There are two main types of corporate restructuring. The first, financial restructuring, concerns changes to the financial structure of equity capital and debt capital. This could include refinancing or restructuring of debt or equity restructuring. 

The second, organizational restructuring, concerns the reorganization of corporate structures to cut costs. This could include reducing the size of the workforce, eliminating hierarchical levels, realigning job positions, and changing reporting systems.

Common restructuring strategies for struggling businesses 

There are many options open to struggling businesses, and the choice will depend on the individual challenges and circumstances surrounding this decision. Here are some of the more common strategies: 

•  Mergers– we talk about a merger when two or more businesses fuse to create a new company. 
•  Demergers – in a demerger, a company transfers one or more of its business undertakings to another company. This means that the company splits one or more business activities from the core company, with the intention of forming a new company that operates independently, or to sell or dissolve the new business unit.
• Disinvestment – also known as divestment - is the sale or liquidation of a subsidiary or an asset (such as intellectual property). This can also refer to the reduction of capital expenditure, enabling the business to re-allocate funding to more profitable business areas. An example of this is the sale of Reebok by Adidas. 
• Acquisition - An acquisition is when a company purchases more than 50% of another organization, either with or without the approval of the target company. Mergers and acquisitions are used when a company is facing financial difficulties, but also when the companies recognize that they would be more profitable and efficient as one company.
• Joint Venture (JV): two or more companies form a new business entity into which they contribute agreed resources. The companies share expenses, control, and profits of the new Joint Venture company. For example, the Universal Pictures and Warner Bros. Joint Venture.
• Strategic Alliance – less complicated than a Joint Venture, a strategic alliance involves two companies with a shared goal and target audience who work together on a project. Though they share resources, each company remains independent. Examples include Louis Vuitton and BMW and Uber and Spotify.
  
  

Though corporate restructuring is often undertaken when a company is in financial difficulties, it can be an excellent opportunity to refocus and regain lost ground. Organizations need to respond to changing customer demands, market forces, or the current economic climate to survive.

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